Dipping Into Metals Miners

Gold and silver mining stocks have been destroyers of shareholder value over the last year and a half amid a perfect storm of profit-wrecking. The industry has suffered declines in underlying metal prices and soaring cost inflation, as well as inopportune strikes at mines and governments in geopolitically risky parts of the globe demanding a bigger slice of the pie. Many mining stocks have suffered 60% to 80% declines as a result.

As a result, miners are finally taking some positive steps to arrest their profit slides. They are pulling back on expansion plans, cutting production from marginal assets, slashing operational and capital budgets and, in some cases, reducing dividend payouts. Over time, these actions should result in better times ahead for players in the sector. For patient value investors willing to wait for the cycle to turn, following are two miners that should have much brighter days ahead.

Endeavour Silver (EXK) is a small Canadian-based producer whose production comes primarily from several mines in Mexico. I have slowly been accumulating the shares throughout 2013. The stock was a disaster in the first half of the year, but it has behaved in better fashion more recently: Over the past month, it has moved from sub-$3 to above $4.

There are several things I like about this small silver producer. First, its all-in overall cost of production is just under $11 per ounce. That makes the company nicely profitable, given that silver is currently priced above $20. Second, the company's assets are in Mexico -- and the government there is trying to become more investment-friendly so it can attract technology and funding in order to help arrest the declining production from the country's oil resources.

In addition, Endeavour has little debt and has managed to double its operating cash flow over the past three years despite the difficult operating environment. The stock is cheap, quoted at 8x next year's consensus earnings estimates and just 17% above its book value. The company has had nine straight years of production growth, and gold now accounts for 30% of total production by revenue. Endeavour does not hedge metal prices, so it stands to move substantially if precious-metal prices improve.

Gold Fields (GFI), the more speculative of these two names, is another Canada-based gold miner I have been slowly accumulating over the last six months. The company has mines in Africa, Peru and Australia, and the firm spun off most of its South African assets into a new entity called Sibanye Gold (SBGL) earlier this year. Gold Fields shares sold for more than $14 early in 2012, but they have since fallen under $6. Despite the drop in gold prices since the peak in 2011, the company is still profitable, and it also pays a 2.5% dividend.

The stock is cheap, trading under book value and at less than 4x its trailing annual operating cash flow. The company is cutting capital expenditures, and has dropped its real cost of gold production by 2% last quarter, to a level that's now below the price of the yellow metal. The company is focusing on smaller projects with higher-grade ore in order to continue dropping its recovery cost per ounce. Consensus earnings estimates call for a profit of $0.50 per share in 2014, but those targets could go much higher if gold prices gain traction.